Coronavirus: Reserve Bank rules out 'kneejerk' reaction to COVID-19 economic threat

Reserve Bank governor Adrian Orr says New Zealand is in a "good space" to face the fiscal fallout of COVID-19.
Reserve Bank governor Adrian Orr says New Zealand is in a "good space" to face the fiscal fallout of COVID-19. Photo credit: Getty Images

The Reserve Bank is preparing a toolkit of unconventional monetary policies such as negative interest rates or asset buying, but said there is no need to use them at the moment.

In a speech, governor Adrian Orr has outlined measures that might be used if changing the official cash rate (OCR) proved ineffective in targeting inflation and maximising employment.

"The Reserve Bank of New Zealand has not, and still does not, need to use alternative monetary policy instruments to the OCR. But it is best to be prepared."

The OCR is currently at a record low 1 percent, and economists expect a cut to 0.75 percent or even 0.5 percent at the next review on 25 March will be needed to counter the effects of the Covid-19 virus on the economy.

Orr stressed that the release of the unconventional tools was not a response to the virus and skirted any direct comment on the issue.

"We are in a positive monetary and fiscal position."

He said the country was in a "good space" and did not need "kneejerk" reactions.

Among the tools outlined are cutting rates below zero, lending banks money with conditions to ensure it went to businesses and consumers, buying government bonds, and giving forward guidance on policy.

Orr said which of the tools might be used would depend on what issue the central bank needed to tackle, and what the consequences of the policy might be.

For instance, a cut in interest rates to zero or lower might re-ignite the housing market.

He also said there was only so much that the Reserve Bank and monetary policy - conventional or otherwise - could do and that it would need the government to step up to support economic activity.

"All of the conventional and unconventional monetary policy interventions discussed will be more effective when coordinated with supporting whole-of-government intervention activities," Orr said.

Independent economist Cameron Bagrie said he also inferred that there would be no chance of a move in the OCR before the next meeting on 25 March.

"Don't expect the Reserve Bank to be joining the chorus of moves across other central banks to cut rates intra-meeting any time soon."

RNZ

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